Title: The relationship between dividend- and non-dividend-paying stock prices when considering financial distress

Authors: Reza Rahgozar

Addresses: Department of Accounting and Finance, College of Business and Economics, University of Wisconsin-River Falls, River Falls, WI 54022-5001, USA

Abstract: Previous studies on whether dividend policies affect stock prices have offered contradictory results. This study investigates whether dividend-paying stock prices outperform non-dividend-paying stocks and whether there is a strong relationship between dividends and stock prices. It also examines the financial health of dividend-paying firms vs. non-dividend-paying firms. The empirical results show that there is a strong relationship between share prices and dividends. The Altman financial stress test shows that the average Z-scores of non-dividend-paying stocks are higher and are more volatile than dividend-paying companies. The Z-score test strongly rejects the hypothesis that dividend- and non-dividend-paying firms are equally exposed to financial risks. Contrary to some beliefs, the results of this study show that dividends are an important factor in determining stock prices and dividend-paying stock prices are less volatile than non-dividend-paying stocks.

Keywords: valuation; stock prices; dividend paying stocks; non-dividend paying stocks; financial strength; financial distress; dividend policies; dividends; financial stress test; price volatility; financial risks.

DOI: 10.1504/AJFA.2015.067795

American Journal of Finance and Accounting, 2015 Vol.4 No.1, pp.19 - 27

Received: 08 Apr 2013
Accepted: 25 Mar 2014
Published online: 05 Mar 2015 *

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